Graphical derivation of beta A firm wishes to estimate graphically the betas for two assets, A and...

Graphical derivation of beta A firm wishes to estimate graphically the betas for two assets, A and B. It has gathered the return data shown in the following table for the market portfolio and for both assets over the last ten years, 1994–2003.

	Actual return
Year	Market portfolio	Asset A	Asset B
1994	6%	11%	16%
1995	2	8	11
1996	-13	-4	-10
1997	-4	3	3
1998	-8	0	-3
1999	16	19	30
2000	10	14	22
2001	15	18	29
2002	8	12	19
2003	13	17	26

a. On a set of “market return (x axis)–asset return (y axis)” axes, use the data given to draw the characteristic line for asset A and for asset B.

b. Use the characteristic lines from part a to estimate the betas for assets A and B.

c. Use the betas found in part b to comment on the relative risks of assets A and B.